Let’s say you’re out with a friend. You go and have a meal, catch a film and have a few drinks. The only hitch is he’s forgotten his wallet (how convenient!). But it’s no big deal. You have enough cash on you, so you pay. The next day you ask if he can transfer you the money he owes and he replies that he won’t pay you back. Instead, he’ll just subtract it from the larger, longer term debt you already have with him.
Though it’s reasonable enough on the face of it, this leaves you twice as far out of pocket than you planned to be and could put you in an awkward position financially. Indeed, it could make it even harder for you to repay the debt in question, given that running out of cash can give rise to a whole load of extra expenses. For instance, it may mean you need extra time to cobble together money to pay a bill and then end up having to meet late fees too. In short, the unannounced decision to suddenly take back monies owed could wreak havoc with your carefully planned budget.
‘Setting Off’ is essentially the same thing as described above, but on a larger scale and with your bank in the role of the wallet-less friend. If you have money deposited with a bank, but also have a separate debt with the same bank (for example, you are behind on your credit card repayments but have cash in your savings account) they do, in some cases, have the right to go and simply take the money they are owed from you – even if you hadn’t had any intention of the money to be used in this way.
Whilst we all want to pay off our debts, we always have to prioritise. You’ll always put paying for your daily essentials, such as food and utilities, ahead of paying a debt. That’s a matter of simple necessity. Even if you do have enough capital available to start wiping out your dues, it makes sense to put paying for an expensive or essential debt (a high interest short term loan or a mortgage, for instance) ahead of paying for a relatively small, affordable unsecured debt like an outstanding credit card balance.
If a lender suddenly decides it’s taking what it’s owed without consulting you, your sensible plan for managing your money could be thrown out of the window. So, how do you avoid having the banks make a mess of things without your permission?
Keep it Separate
Obviously, if you have a bit of debt in one place and your savings safely stashed away somewhere else, one organisation is not going to go and hand your money over to the other without your express consent. Therefore, the simplest way to avoid any issues with setting off is to avoid taking out credit at the same institution you save with. If you’re already borrowing and saving with the same people, you will generally find it’s easiest to move your savings as opposed to your debts (though stoozing provides a helpful exception).
Of course, in this day and age it’s hard to tell whether banks are truly separate, or in fact part of the same larger conglomerate. For the purposes of setting off, it comes down to the banks legal identity, which in turn is determined by the way that the company is registered at Companies House. Generally, these are just the separate brand identities that you’ll be familiar with, but it is simple enough to check if you are unsure.
Know the Rules
The rules around setting off are contained within the Lending Code. The code is a set of rules that is adopted voluntarily by banks. However, though it’s not obligatory to sign up to the code, if an institution agree to use the rules then they need to adhere to them.
With regards to setting off, the code states that banks do not need to give a specific advanced warning before they move your money (if they did, you would just withdraw it or transfer it away from the account before they had a chance to get their hands on it!). However, they do need to make it known to you that there are a set of circumstances in which they may attempt to recover debts by moving your money at some point before they actually attempt to do so.
The code also states that banks need to make an effort not to leave you in a difficult situation. They should, in theory, never take an amount that will leave you struggling to pay for your day to day essentials and top priority debts (mortgages being the best example.) They are also warned to take extra care in dealing with people who are depending on benefits in order to make ends meet and those who are having to put money towards a special, important purpose, such as healthcare costs.
Finally, they are supposed to make you aware that money has been taken from your account to help you avoid unwittingly spending money that you no longer have. Disappointingly, there is no fixed time frame in which they are supposed to make this known to you.
If banks are setting off money from your savings or current account in response to the fact that you are falling behind with a debt, then they are supposed to make reasonable efforts to get in touch with you and discuss the matter first. It is only if you fail to respond to mail and calls that they are entitled to go ahead and move the money. This is just one of the many good reasons that you should be proactive in seeking an agreement with your bank if you find you are running into trouble with a debt.
If you get in touch with a non-profit debt counselling service such as Step Change then you may be able to get an extra 30 days breathing space. If you are struggling with debt and mental health problems then you may be able to get further dispensation. Click the link to read our guide to the subject.
If you are unsure of your bank’s policies it can bear fruit to simply approach them for clarification. Checking their terms and conditions is not always helpful as, in some cases, a bank will have an automatic right to carry out setting off. In such instances they do not need to explain the situation in their terms and conditions.
What Should I Do If the Rules Have Been Broken?
As stated above, in many situations a bank will be, legally speaking, perfectly entitled to move your money to recover what you owe. This means that, if it hasn’t put you into tangible difficulties, then there’s not a lot you can do about it, aside from moving your money elsewhere to prevent it from happening again.
If, on the other hand, the money has been whisked away from your account in a manner that contravenes the guidelines laid out above, then the bank should refund you. This should, hopefully, be a fairly straightforward process. As long as you can demonstrate that it is going to have a negative knock on effect that could lead you into hardship, they should have little choice but to refund you having had the situation explained to them in writing.
If they fail to do this then you need to look beyond your bank and refer to the financial ombudsman. They should help settle the dispute and can deem that you have been unfairly dealt with, irrespective of the fact that the bank has a legal right to use setting off. They are impartial and independent so you can be sure of an unbiased hearing. Better yet they are free, so you have nothing to lose by appealing to them.
The ombudsman can be reached online, or by calling 0800 0234 567 (or 0300 123 9123 from a mobile). Unfortunately, you cannot go straight to the ombudsman for help. You first need to try and come to an understanding with the bank (the ombudsman is really supposed to be a last resort). They will only be able to look at your case if you have already attempted dialogue with your bank, even if this only ever went as far as you complaining and the bank refusing to do anything about it.
You also need to bear in mind the timeframe that will apply when going down the ombudsman route, as they will only take on your case eight weeks after your initial complaint. If you really are left struggling as a result of your bank’s actions, two months is an awfully long time to be left in the lurch.
With all this in mind, as we frequently say on this site, prevention is better than cure. If you are at all worried about keeping on top of all the repayments you are supposed to be making, even if it’s not a major concern, split your savings and current account from your debts to avoid any possibility of setting off putting you in a tough position. If you are running into trouble, its best to contact your bank and confront the issue head on. Though it should be easy enough to get back money that is taken unfairly, your life will be simpler if it isn’t taken in the first place.
